Does Early Retirement Make Sense for You?

Retirement is supposed to be a time where you enjoy the fruits of your labor. Since that’s the ideal, it’s exciting to retire early enough that you can really enjoy your time post-workforce, and it’s certainly plausible to do that by retiring at 65. But what if you want to get a jumpstart on your retirement life?

In determining whether early retirement makes sense for you, there are several factors to consider. This post will take a look at some of the factors you need to think about. Of course, everyone has a different situation and there’s no substitute for the experience of a trusted financial advisor.

First, let’s talk about the nature of your separation from working life.

Why Are You Retiring?

Although the question of why you’re retiring can be a worthwhile philosophical thing to ask yourself, for now, think in the broadest strokes. Are you leaving voluntarily or being given a gentle nudge because of cuts in headcount, or are physical issues making work difficult?

Permanent retirement may or may not be a good thing at this stage of your career, but the way you answer this question can inform whether leaving the workforce is right for you.

First, we’ll take a look at retirement on your own timetable and then get into how to decide how to decide on whether to take a company’s early retirement offer.

Retiring on Your Terms

Choosing your own retirement timeline is probably the way most people imagine it when they first enter the workforce. Maybe you’ve got goals to travel, start your own business or just spend time with the grandkids. Personally, I would love to get writing that novel out of the way one day before I’m too old to write it.

Whatever your plans are, this section aims to give you some practical advice on how to get there.

Define Your Timeframe

The first step is to give yourself a concrete goal to work toward. You need to know exactly how much money you need to have to retire.

In order to do that, you need to figure out what exactly your expenses would be if you were to retire. When setting your budget, remember that one goal of retirement might be to do so comfortably enough that you can really enjoy it.

With that in mind, you’ll likely want to cut out any spending on things you won’t use or need – but if something truly brings you enjoyment or happiness, keep it in that future budget. Many people don’t want to live with a reluctance to part with every penny and you shouldn’t have to.

You also may be able to build into your future planning that, with inflation, your salary and your cost of living are both likely to increase in the years between now and your retirement. The Bureau of Labor Statistics has employment projections for a number of fields that may help you get an idea of the way things are trending in your industry.

How long can you make that money last? One popular early retirement strategy holds that if you withdraw no more than 4% of your equally divided stock and bond-based retirement portfolio, you shouldn’t have issues running out of money.

Mark Radulovich is a financial advisor and the founder of Houston-based Prota Financial. He has a modification of this 4% rule.

“I tell my clients that they know they can retire when the market can have a large drop (say, 30% – 50%), and they can live off a 4% income stream from that,” he says. “Realistically, that is the worst case people are likely to see, and if they’re ready for it, they can sleep well at night.”

Radulovich says people should plan to live into their 90s as well – so you’ll need to make sure you feel your money can last.

Planning for that kind of drop in the market may be a worst-case scenario, but regardless of whatever actually happens with stocks and bonds, you’ll need to save a lot of money if you’re going to live on it for the rest of your life. Let’s talk savings next.

Save Diligently

There’s no concrete number for how much anyone should be saving, because it all depends on what you want your retirement lifestyle to be. However, if we assume that you want retirement to be at the same standard of living (or even better), it’s best to start saving as much as you can as early as you can.

Financial coach Rocky Lalvani, who runs Richer Soul, says that you should start saving as soon as possible. Even if it’s 1%, it’s a start.

“You won’t miss the 1% in your check and if you continue to add to it every year by splitting your raise to saving and spending so you can increase your savings rate. Over
time you can build up to 20% – 50% savings rate through small steps. Adding
2-3% a year to savings over a 10-year period becomes a 20% – 30% savings rate.”

Although you may not be able to save 20% of your income for retirement right away, one factor you’ll also want to consider is whether you receive an employer match. For example, if your employer is willing to match up to $2,000 of your savings at a rate of 15%, you should save at least $4,000 in order to take full advantage of the employer match. In this way, you make sure you’re not leaving free money on the table.

The important thing is to get in the habit of saving. There are several ways to increase your savings potential, but it’s important to make it a habit. If your company offers payroll deduction for your 401(k), set a percentage you’re comfortable with having taken out of your wages. It’s a good idea to reevaluate the amount you’re saving at least once a year.

You can take the money from any savings strategies you employ and use some of it to cover expenses so that you can put more of your paycheck toward saving for retirement.

Finding Other Sources of Income

If saving alone doesn’t get the job done for you in the timeframe you desire, don’t despair. This might be an opportunity to pursue one of your passions and get paid to do it. Let’s talk about side hustles.

The first thing you can do is identify things you’re good at and really enjoy. We spend enough time in our primary jobs during the things necessary to bring home the bacon and pay for normal necessities. With our time away from work, we might as well do something we get enjoyment out of.

Once you’ve identified your passion and your skills, it’s time to think about how to turn that into a business. Do any skills you picked up in your hobbies or work life serve you in your next venture?

As an example, let’s take the story of Paul Dillon who owns Dillon Consulting Services. He’s taking the approach of a gradual distancing from the workforce.

“I firmly believe that one of the ways to be content in retirement is to stay active and engaged with the world,” he says. “I have done this by creating my own ‘bridge job’ to final retirement. For those who are considering retiring early and have an expertise, becoming a consultant is a tried and true ‘retiree’ bridge career. Becoming a consultant on your own, a sole proprietorship, in your field of endeavor offers a chance to set your own hours and work at your own pace.”

Rocky Lalvani says another way to give yourself more income before retirement is to take a look at buying real estate as a source of passive income. Once you pay off the loans, the money from the rent can provide an income stream without you having to do anything aside from maintenance. Rental property can be a nice source of cash, provided you’re ready to become a landlord.

Edd and Cynthia Staton decided that they wanted to retire to Ecuador eight years ago. They also liked to travel.

“We wanted to travel, preferably on someone else’s dime,” Edd says. “In exchange for offering marketing expertise to a local tour company, we’ve taken fabulous trips all over the country.”

The couple has since written three books between them and serve as international speakers and correspondents for a travel magazine.

Their key to retirement? Ask yourself what you want out of retirement.

“Not what your boss, society, or even your family wants,” Edd says. “You at last get to choose your destiny unshackled from the expectation of others.”

You don’t always get perfect choices. What should you do if you’re being offered a voluntary retirement package? Let’s go over that next.

Voluntary Retirement

So far we’ve talked about situations in which you choose to retire on your terms. What happens if your company offers you voluntary retirement in hopes of cutting back on its workforce?

If you find yourself the subject of one of these offers, you have a decision to make.

Does the severance package include extra years of service? This can be important if you have pension benefits that are related to service time with the employer. If the retirement plan isn’t service-based, are there bonus incentive dollars being offered?

Does it include health care coverage for any length of time? This can be especially important if you haven’t reached Medicare age.

Will you be paid for any vacation and/or sick time you haven’t taken yet?

You do have the option not to take the package, but you should think long and hard about taking it. If a company is looking to cut positions, even if you survive this round of cuts, there’s no guarantee your position will be around in a year or two. Make sure you really consider the reason for the cuts and the long-term financial future of the company. If you’re not yet ready to retire, it may be time to start looking for other jobs.

A Case Study

Jeffrey Orens was offered an early retirement package by his employer as a result of a merger with another firm after he spent 40 years as a business executive in the chemical industry. When he retired, he wanted to look at his situation from the perspective of financial stability, time for family and friends, and future plans.

On the financial side, he discovered he was in pretty good shape.

“Financials broke down into having enough saved and invested to live in a comfortable manner for the next thirty years, assuming my wife and I want to travel significantly over the next 10-15 of those years, as well as to have health care costs adequately addressed (tough to calculate, but we took a realistic stab at it),” he says.

In addition to finding more time to spend with his family and meeting friends for lunch and a day on the links, Orens says the other huge thing he enjoys is the free time he has.

“I enjoy writing about business, history and sports (Detroit’s trade of Justin Verlander at the trade deadline last summer destroyed me when it came around to haunt my Yankees at playoff time!),” Orens says. “I have jumped into research and writing about stories in these subject areas with a passion, having my first article slated to be published later this year.”

I have to agree with him on one thing. As a Detroit Tigers fan, the trade of Justin Verlander still haunts me as well. Kidding aside, early retirement has treated Orens well. In addition to writing, he’s taken up baking and regular exercise.

Have you considered early retirement? What factors have played into your decision? If you’ve take an early retirement, feel free to share what you’re up to in the comments below.

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This Post Has 4 Comments

I’m a tortoise. I’ve had a 401k for over 30 years. With pay raises, I increased what I contributed until I maxed out. I am blessed to have a pension. I had a target savings amount, which I hit last year. I consulted my CFP. I’m getting my trust done. I had to mentally prepare 2 years in advance for not working. I golf. I garden. I can buy a sprinter and travel.i have a mortgage I can handle. I’m psyched! I’m lucky.

I just sold my home which was financed through Quicken Loans. I’m in the process of building a small log home in the same community.

If I qualify, do you loan money on new home construction? I already own the real estate where it is being constructed, and just need about $15,000 to complete construction. Please let me know. Thank you

We only do new construction loans on homes that have already been built (i.e. you’re getting it from the builder). However, in your situation, you’re talking about such a small loan amount that it might make more sense to go with a personal loan. The closing costs on a mortgage at a small loan amount like that may not make sense for you. Our friends over at RocketLoans can help you look into your personal loan options if you want to go that route. Thanks for being such a great client and I hope this helps!